Abstract
Aggressive tax planning has become a sustainability problem, as governments have to cope with less tax revenue, which is crucial for investments in sustainable development goals. The OECD and the EU authorities have taken several initiatives against aggressive tax planning, such as the Action Plan against BEPS. However, these initiatives lack effectiveness, and aggressive tax planning is still omnipresent. We analyze the fight against aggressive corporate tax planning from a Real Option Theory perspective, in order to find an explanation for the difficult shift of companies’ aggressive tax planning strategies to more sustainable tax behavior. The Real Option Theory shows that, as long as the option to ‘delay’ the investment in sustainable tax behavior has too much value because the benefits of such investment are uncertain, companies will wait. Based on this new understanding, we suggest additional public policy interventions against aggressive tax planning. These interventions aim directly at reducing this real option value (of waiting).
Highlights
While tax planning is traditionally a part of companies’ strategic policy [1], especially aggressive types of tax planning have become a sustainability problem [2,3,4]
Aggressive tax planning has become a sustainability problem, as governments have to cope with less tax revenue, which is crucial for investments in sustainable development goals
The estimated amount of the tax gap may vary depending on the definition of aggressive tax planning, a research paper of the European Parliament clearly shows the magnitude of the problem, and estimates the loss of tax revenue to the European Union (EU) Member States through aggressive corporate tax planning to be around 160–190 billion euros per year [7]
Summary
While tax planning is traditionally a part of companies’ strategic policy [1], especially aggressive types of tax planning have become a sustainability problem [2,3,4]. It relates to arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place” [20] This is in line with the definition of the European Commission, which describes aggressive tax planning as “taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing tax liability” [8]. This study introduces real option logic into the field of international taxation, and more to decisions that deal with (‘investment’ in) sustainable tax behavior. These suggestions consider the impact of stakeholder support, uncertainty, first mover advantage and the time window available to opt for sustainable tax behavior in the (near) future
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